With rising interest rates, Guaranteed Investment Certificates (GICs) are back in the spotlight. But are they a good investment today, especially with inflation running high?
In this post, we’ll walk through how GICs work, when they make sense, and why timing and purpose matter more than ever.
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What Is a GIC?
A GIC is a term-based investment that pays you a guaranteed interest rate. For example:
- You invest $100,000 in a 1-year GIC at 2%
- After one year, you receive $102,000
Generally, the longer the term, the higher the interest rate. You can choose:
- Redeemable GICs: Allow early access to funds, usually with lower rates
- Non-Redeemable GICs: Locked-in until maturity, usually with higher rates
The Catch: Taxes and Inflation
At first glance, GICs look safe and predictable, but after taxes and inflation, your real return may be negative.
Example:
- You earn $2,000 on a $100,000 GIC
- At a 30% tax rate, you owe $600 in tax
- Net return = $1,400 or 1.4%
Now factor in 3% inflation:
- You’d need $103,000 to maintain your purchasing power
- You only have $101,400
- Your real purchasing power = $98,400
- Net loss = -1.6%
Even when GIC rates rise, say to 4%, the problem remains if inflation is also high. At 4% GIC interest with 30% tax and 7.7% inflation, your real return is -4.9%.
So Why Buy a GIC?
Despite low real returns, GICs serve an important purpose: capital preservation.
They make sense when:
- You need the money in less than 5 years
- You can’t risk market fluctuations
- You want predictable, guaranteed income
When GICs May Not Be Ideal
If you have a longer time horizon, history suggests the stock market offers better long-term growth, even after volatility.
Example:
- Bob invests $100,000 in stocks and loses 20% (now worth $80,000)
- He moves to a GIC earning 4%
- It would take him 6 years to get back to $100,000
But staying invested in the market may help him recover sooner. Even after the 2008 crash, the U.S. market rebounded in just over 3 years.
What If You Just Came Into Cash?
Let’s say Bob receives a $500,000 inheritance:
- If he doesn’t need the money for 5+ years, this could be a great time to invest in stocks while prices are low
- If he needs it within 5 years, GICs provide stability — even if real returns are modest
In short:
- Short-term needs = GICs may make sense
- Long-term growth = consider market investing
Final Thoughts
GICs are useful when your time horizon is short or your risk tolerance is low. But with today’s inflation, even high GIC rates might not protect your purchasing power.
If you don’t need the money for 5+ years and are comfortable with some volatility, better long-term opportunities likely exist.
